Amazon.com may face 'taxing' issue on Netflix

Buyout rumors pump up stocks, but analysts remain skeptical of deal

DanGallagher

SAN FRANCISCO (MarketWatch) -- The latest merger rumors pushed up trading on Amazon.com and Netflix Thursday, even though most Wall Street analysts remain highly skeptical of such a combination.

Several analysts pointed out that buying Netflix could endanger Amazon.com's ability to sell goods to consumers free of sales tax, which has proven to be a major competitive advantage for the online retailer.

"The benefit to Amazon from this kind of deal is not clear," said Edward Woo of Wedbush Morgan. "All of a sudden, purchases in California would get more expensive by 8%."

Both stocks opened trading strong Thursday morning amid fresh rumors that the two were looking at some sort of merger deal.

The rumor provided the largest boost to Netflix
NFLX, -0.29%
which as seen its share price slip more than 28% since peaking in early December.

The shares jumped as high as $25.99 -- a 15% gain from the previous close -- before cooling later in the day. The stock closed trading up 5.9% at $23.93 by early afternoon.

More than 8.4 million shares were traded, compared to the stock's normal daily average of 1.7 million.

Amazon.com
AMZN, +0.17%
which has been on a tear for the past two months, also got an early boost, trading as high as $74.72 early in the session -- setting a fresh 7-year high. Shares slipped by the end of the day, with the stock closing down 25 cents at $72.04.

Merger rumors first surfaced mid-afternoon on Wednesday. In a note to clients, Brian Pitz of Banc of America said a merger of the two companies was "unlikely" and cited the taxation issue as the largest obstacle to such a deal.

"In general, the basic reason why eCommerce companies are not required to charge state sales taxes online is because most eCommerce operators do not have a physical point of presence in most states," Pitz wrote.

Since Netflix has more than 40 distribution centers across about 30 states, a change of ownership would likely put Amazon.com on the hook for charging sales taxes in those states.

Derek Brown of Cantor Fitzgerald said in an interview that there are "a number of strategic elements that would be compelling" for the two companies to consider a merger. However, he called the taxation issue a "wild card" in any merger negotiations.

"I don't know if Amazon could structure the deal in such a way to avoid that, but it's definitely an issue," Brown said.

Jim Friedland of Cowen & Co. called the speculated pairing "unlikely" because of the independent cultures at both companies. But, Friedland says if they did defy expectations and execute a deal, "they'd make a good fit." Listen to interview with Friedland.

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